Digital Transformation of the Board of Directors

Discussion: The boardroom is not generally associated as the nerve centre of entrepreneurism within a company; particularly a company trading on the ASX. The role of the typical director is more about audit, risk reviews and compliance and see ‘entrepreneurship’ as a risk element and as such not part of good governance. Often this means keeping one or even two eyes on the rear-view mirror and yet maybe the biggest threat is ahead and not yet fully visible in the headlights. Most directors have little experience or even understanding of these types of risks. With many directors of ASX200 companies being recruited from larger and more established companies, few of them can boast about any entrepreneur experience. Do boards need to be more entrepreneurial to detect and counter such modern-day risks? As such could a more diverse Board in experience, age, culture and business experience as well as more appropriate governance structures address this?

We are living in a fast paced and rapidly changing world. The environment in which companies now operate is constantly changing, and yet the behaviour of directors and how the majority of boards operate has not. They spend time on compliance and on examining historical data on company performance and comparisons to budgets, but the strategic role remains mainly an annual event, completed, printed and filed away for 12 months. Even just a decade ago changes to markets and consequential business challenges were slower paced. However, since the dawn of global connectivity, big data and the maturing of the World Wide Web companies are being threatened at a much greater pace and competition is global. Directors have to handle issues relating to modern-day risks (disrupters) associated with ‘digital transformation’, Cybercrime or even the IoT (Internet of Things). The threat posed by disrupters can be catastrophic and quickly bring down what was a very successful company. The board needs to become more innovative and predictive towards these modern-day risks – they have to become more entrepreneurial.

Entrepreneurship is one of those emotive words that create a less than favourable image to the average well-established director. It more often than not evokes images of a Bond or a Skase or one of the more recent mining billionaires. In the past the word has been used to describe an action that may not have always been honest or rigorous. However, entrepreneurship is really about exploiting innovation, commercialisation and monetising an Idea. If correctly structured and with the right checks and balances and traceability it can be undertaken very successfully at board level for all types of companies. In a rapidly changing world, procrastination and ignorance of impending disrupters is a risk in itself. One the board should take very seriously.

So being entrepreneurial doesn’t mean accepting risk, but it does mean considering opportunities to overcome the risk of doing nothing against a disrupter. There will typically be many different opportunities that may overcome risks and the real trick for the modern board is how it manages those opportunities to achieve the optimum outcome and at the same time provide a level of transparency and accountability for decision-making. This is Opportunity Management and it can be used both as a shield to help defend against disrupters and can also be used as a sword to spearhead new business initiatives driven by innovation.

Successful boardroom entrepreneurship moves the governance framework towards being proactive and less reactive. The modern board must embrace innovation and consider its implications at every opportunity to ensure it can shield against disrupters as well as take on new initiatives that may grow the business. This is reflected throughout the organisation as the company culture transitions towards being innovative and agile. Leadership starts at the top of an organisation and so the board must set the tone on both innovation and agility. This must mean understanding the risks and providing Executive Management with the room to fail; the room to take risks and the confidence of when to back away from an innovation that may no longer be working.

Opportunity Management forms the catalyst that links innovation to entrepreneurship. Successful entrepreneurship can be defined as a management outcome: Anybody with a good idea (innovations) can use a management process (Opportunity Management) to become a successful entrepreneur. Although this sounds counter intuitive to our more habitual definition of entrepreneur, the implications are that anybody with the right tools can be an entrepreneur - yes anybody and that includes a board of directors. Opportunity Management provides a method of traceability and assessment to enable different opportunities to be assessed and compared to each other and as such create the most appropriate strategy for a business. At board level it enables the directors to make an assessment of divergent and totally different ideas and concepts within an analysis system that brings comparisons to a single framework. The trick is to get them into some form of order and determine which opportunities are likely to create the greatest rewards for the company (which may not be fiscal).

The new disruptive technologies of the sharing economy such as UBER and Airbnb are already making a significant impact on the market value of companies in transport and hospitality. Although not conceivable today, an UBER type attack on the banking and finance area could have staggering implications across many markets and not just the retail banks. In fact, this disruption has already started in the banking sector. People are collaborating to exchange money and bi-pass the banks foreign exchange departments. How it will impact shareholders and possibly the massive superannuation industry we cannot really contemplate. Modern boards need to better understand threats and also be able to assess more innovative growth strategies if they are to compete in the rapidly changing world we live in. This means a different set of skills are needed at board level in addition to those more traditional ones.

The business environment has changed rapidly. Businesses and boards must also change to meet the demands of the modern age. An Entrepreneurial Board is best placed to manage those changes and also to create disruptors that will challenge those left behind.

An important function of every board is to ensure the future of the business. In days long past a company could quietly continue doing what it had been doing for years and meet that ‘longevity’ requirement. These days however, the need to embrace changes and innovate is critical to every business in both the for-profit and not-for-profit sectors. Will we ever forget Kodak and its amazing collapse after being a highly successful business that neglected the need to change when digital photography was first introduced? The irony, is the technology was originally developed by Kodak in 1975 and effectively was discarded because they feared it threatened their photographic film business. The digital, and at the time, much smaller companies took it on and everything else is now history. Although this is a classic example and a tragic one for the shareholders and staff, there are many others and even many more to come as globalisation, digital transformations and the sharing economy start making major changes to the behaviour of customers.

Central to change is Innovation...

An Innovation may not be novel. From a business perspective an Innovation can provide the basis by which a company changes state (hopefully positively) in some way. The innovation may be simple such as a teaming agreement or entering a new market or building a new product for example. However, an Innovation created by a third party can become a Disrupter if the impact of that innovation makes a paradigm shift in the market or the behaviour of the market. Such an impact can make an existing business model or product obsolete almost immediately. With globalisation these innovations rapidly go viral and can create severe damage in just a few hours to an existing and established business. Take Uber as an example. Their business model exploits the sharing economy by linking demand with delivery through a single interaction using a smart phone as opposed to the more command and control structures for traditional taxi companies. As such the taxi (and transport) industry has been disrupted whereby it will need to disrupt its own business model or face extinction. Likewise, AirBnB has disrupted the hotel market to such an extent that the Hotel Associations are trying to get regulations imposed to reduce the damage caused by on-demand and lower cost rooms for hire. One gets the feeling that for many Boards this is like watching an accident in slow motion; terrible but as a director she may be powerless to act to minimise the damage. Yet an innovative spark and initiative at the first identification of the disruption (or better still BEFORE) may have prevented the accident from happening: Foresight and prevention and not hindsight.

The typical board meeting spends little time considering strategy; thinking about Innovation can be measured in milliseconds. The directors have a duty of care to their shareholders and to the company employees. But how many boards spend time discussing the competition, or new developments in technology or even possible changes to regulations that may, in the future impact the business? These areas for many boards are never discussed; the standard Risk, Finance, Nominations Committees do not seem to be the most appropriate in our current world. There is a case to review the Board Committee guidelines and include Innovation, otherwise Technology and disruption will never really be considered under the existing mix. They will continually be looking backwards at the accounts and be updated on variations of the budget and forecasts – one or both eyes will remain transfixed on the rear-view mirror whilst the vehicle continues to move forward through uncharted territory. Having attended hundreds of board and committee meetings over the past 30 years the amount of time we discussed the business strategy of competitors, or a new technology which we thought may enter the market was never!

Even in the NFP sector, directors are often driven more by passion than clinical financial outcomes. A better understanding of new ways and ideas on fund raising or considering the methods used by other NFP organisations is very applicable. Different business models or revenue models, perhaps? The crowd funding model has been used over many years to help fund events and activities. The first ever known internet crowd fund was undertaken by fans of the British Rock Band – Marillion to raise $60K to pay for a tour of the US in 1996. It is expected that crown funding will hit $1,000 Billion by 2025.

Directors cannot continually look backwards to move forward. With time of the essence in trying to fend off disruptions as well as create disruptions for your competition it is time to consider how we transition the board meeting so that instead of spending so much time on backward looking and historical data that we do a little bit of creative forecasting and consider the future of the business and the market. Spending some time considering innovation, perhaps just 5% will make an enormous difference to many companies. Instead of reviewing Strategy once a year, review briefly at ever board meeting. Strategy changes too quickly to be reviewed just once per year. Strategy, like innovation considerations are today 'agile practices'. They need constant reviews, resetting goals and creating short term action plans. Place on the agenda an item for competitive trends and behaviour and possible disruptions to the business model. Look to non-related industries for examples of how disruptions have been successfully and unsuccessfully addressed. Spend some time discussing ‘what if’ scenarios so that at least it can create some innovation discussions and then maybe the future of many companies may become brighter and more robust. Being forewarned of an impending threat (risk) will provide the opportunity to develop strategies and so mitigate that threat before its impact is catastrophic. Maybe we all need to reflect on that ‘Kodak Moment’.

Submarines pop-up their periscope before surfacing to make sure nothing un-detected is around. In fact, they will normally pop up an antenna that can detect radars first. This is done so they aren’t surprised by a passing enemy aircraft or maybe hit a trawler that they failed to detect with underwater sensors. Having foresight and being forewarned is much better than hindsight in this situation. For a company in a sea of rapidly changing threats, directors need to be constantly vigilant against the seen and unseen threats around them and as such must behave like submarine commanders.

Business survival requires boards and directors to be more agile and also to be more predictive about disrupters that could be catastrophic for a business. Technology advances and customer behaviour can turn the business fortunes of all companies around very quickly and if the directors are not prompt in the detection and decision-making process the survival of the business is at stake. As mentioned previously in Part 1, Kodak has already been a major casualty of disruption and Uber and Airbnb are now disrupting the market in transport and hospitality. Also consider the decline of Blockbuster video and the rise of Netflix. Also, we should consider the changes that have occurred in print media that has seen the retrenchment and retirement of many journalists over the past 5 years or so. This has happened because of the impact of digital media and drops in advertising revenue.

For the 'Digitally Transforming' director, it is necessary to be constantly aware and predictive so that potential disrupters can be quickly detected and countered. As a result, more effort is needed to create an entrepreneurial approach at the director level through a properly managed process and structure. This means extending the current board committee structure to include Innovation, providing leadership in innovation to encourage management and to bring in a structured management process to manage and assess opportunities and threats. This process I have called - Opportunity Management.

Opportunity Management is a process that creates a level of structure, traceability and comparative assessment. It provides a level of discipline to evaluations that will enable different options and opportunities to be ranked against each other so that a board of directors can make a valued decision.

Disruption when they occur need to be quickly identified and counter measures applied which will nullify or at least minimise or reduce the impact of the disruption. This may result in the application of one or more of several actions (Opportunities) being considered by the directors. For the directors to make a choice it is necessary under Opportunity Management to quickly build a simple model of the key characteristic drivers of the company. This covers factors such as market demand or need for the products or services; pathways to market; competitive pressure; regulatory boundaries etc. The model will effectively define what would be an ideal Opportunity (or the worst possible Disrupter). As Opportunities and Disrupters arise they can be assessed against the model and a correlation assessment can be made. Each time the board meets they can update the information to see if any Disruptors are increasing in threat level, if they are, then appropriate counter measures using one or more of the higher scoring Opportunities can be applied. A registry of disrupters could be developed and maintained by management and reviewed by the board on a monthly basis.

For boards that are lucky enough not be under threat by disrupters, Opportunity Management can be applied to just assess various options in strategy. The process enables choices to be made with a level of scientific method and relative independence. From experience, the author has used the method to assist in choosing subcontractors for a major project as well as assess probability of a win of a competitive tender. It can also compare disparate opportunities such as entering a new market versus new product development. In the NFP sector, Opportunity Management provides assistance at board level to remove the emotion from decision-making. It allows the directors to make comparisons of various options that may otherwise be too difficult to compare. It brings logical analytics to the board table.

Opportunity Management is a risk mitigation process since it provides a metric by which disruptions can be identified and tracked as well as counter measures and new opportunities assessed. As such it improves overall corporate governance and for those directors with little or no experience in entrepreneurship it provides structured assistance.

Sadly, too many directors, particularly of ASX listed companies have limited ability to be able to assess disparate opportunities and threats. It is not part of their psyche. On the whole, most have made careers considering history (accounting, law etc) and not trying to be futurists. Since change is hard, the chairman with the support of the board should consider an Advisory Board/Committee. This is a non-governance and fully independent board that can be used to review opportunities, threats and provide independent review. I wonder, in the case of the banking commission outcome and the behaviour of the Australian finance sector, how many decisions made by the management or the board of those companies would have been different if those companies appointed an Advisory Board.

Disruption disrupts. It is not restricted to just technology, business models, revenue models and markets, it also impacts the way that governance is applied to a business. In a digitally transforming world where change is now measured in seconds and minutes compared to years and decades, we cannot continue to operate under an antiquated governance board structure. Yes, it worked well for our grandfathers but not today. I recall speaking to an executive of a government agency about climate change and the lack of support provided to emerging industries. He said to me that they support existing industries and not future ones. I then pointed out that a hundred years ago they would have supported the Blacksmith over the emerging Motor Car assembly line. I think we all know where that discussion went.

Board have to become entrepreneurial. It doesn’t mean it throws away corporate governance or discard its fiduciary responsibilities. An Entrepreneurial Board is one that has foresight and embraces innovation as a means to encourage survivability and growth in an increasingly disruptive world. With the appointment of an Advisory Board it also creates a new independent set of eyes (and brains) that have experience in digital transformation. An entrepreneurial board demonstrates leadership, agility and professionalism to its stakeholders – the management, staff, shareholders, customers and business partners.